27.1 BHP Limited was incorporated in 1885 to mine zinc, lead and silver deposits in Broken Hill. It subsequently diversified into iron ore, steel making, petroleum, coal, copper and gas. The BHP Billiton group was formed on 29 June 2001 by the dual listed companies' merger of BHP Billiton Limited (Australian listed company, previously know as BHP Limited) and BHP Billiton plc (United Kingdom listed company previously known as Billiton plc). Those two companies and their respective subsidiaries continue to exist separately but operate together as a single economic entity.[669]
27.2 Today, the BHP Billiton group employs 37,000 employees in over 100 operations in more than 20 countries. It is the world's second largest copper producer, second largest exporter of energy coal and a major producer of nickel, uranium, aluminium, oil and gas, and has significant investments in many other mining and industrial ventures.
27.3 BHP Petroleum Pty Ltd, now BHP Billiton Petroleum Pty Ltd (BHPP), is BHP Billiton's petroleum business and has at all times been a wholly owned subsidiary of BHP Limited or BHP Billiton Limited. It explores, develops and produces oil and gas throughout the world, including Algeria, Australia, the United Kingdom, the United States of America, Trinidad and Tobago and Pakistan. Its capital expenditure in 2005 was $962 million.
27.4 Mr Prescott AC was the Managing Director and Chief Executive Officer of BHP Limited (BHP) from May 1991 to March 1998.
27.5 Mr O'Connor was the Chief Executive Officer of BHPP from 1994 until July 1997.[670] Mr O'Connor was succeeded by Mr Aiken, who remained in that position at the date he gave evidence. Mr Aiken first joined BHP in May 1997 as Executive General Manager of Corporate Development, responsible for corporate services other than finance within the BHP group.
27.6 Mr Davidson Kelly was BHPP's General Manager Business Development reporting initially to Mr O'Connor and then to Mr Aiken. He joined BHPP in February 1995.[671] He was responsible for business development in the Middle East and Caspian regions. Mr Davidson Kelly was a member of the executive committee of BHPP and was engaged by BHPP through his company, Davidson Kelly and Co Limited (registered in England). Mr Davidson Kelly's contract terminated on 31 March 2001 and thereafter he was engaged by BHPP on a part-time basis (15 days per quarter). In late 2001 Mr Davidson Kelly's contract with BHPP came to an end.
27.7 Mr Harley moved in 1994 from a position in BHP's Corporate Treasury to the role of Group Manager Financial Structuring in BHPP. Mr Harley's responsibilities as Group Manager Financial Structuring included facilitating project financing in relation to various projects and supporting current and proposed mergers, acquisitions and divestment projects. After Mr Davidson Kelly's appointment in February 1995, Mr Harley, though nominally reporting to Mr Velins, the Group General Manager Planning at BHPP, was in practice directed by Mr O'Connor to report to Mr Davidson Kelly. Mr Harley remains with the BHP Billiton Group. He became President of Corporate Development within BHP Billiton in 2004.[672]
27.8 Mr Lyons was head of the Corporate Legal Department within BHP Limited until March 1995 after which he commenced providing legal support to the BHPP business. From 1995 until 2001 he held the position of Group Manager Legal for BHPP and was responsible for its legal services on a global basis. He reported to Mr Barnes, the General Manager of Finance and Administration who in turn reported to Mr O'Connor. In about December 1999, Mr Fast was appointed General Counsel of BHP Billiton; and Mr Fast reorganised the legal teams that worked with the various businesses of BHP Billiton. As a result of this reorganisation, Mr Lyons became Regional Counsel for Australia and Asia with legal responsibility for all BHP Billiton businesses within that region. Mr Lyons worked part time in that role until his retirement in December 2004.[673]
27.9 Mr Worthington was appointed to the position of Manager, Russia and Middle East Business Development for BHPP in August 1995. He reported to Mr Killion, Vice President of Marketing and Development. In the first quarter of 1996 Mr Worthington was appointed to the position of team leader Iraq and Iran, reporting to Mr Paver, President of BHPP's Europe, Russia, Middle East and Africa regional division. Mr Worthington's team become known as the Business Development Team.[674]
27.10 In March 1996 Mr Stott left the Australian Wheat Board and commenced employment with BHPP as International Business Development Manager[675]. He reported to Mr Davidson Kelly. Prior to joining BHPP, Mr Stott had been employed at the Wheat Board since 1983. Between 1988 and 1996 Mr Stott managed the Middle East, Europe and Africa desk and was responsible for marketing wheat to all non-Asian markets. In July 2000 Mr Stott returned to AWB as General Manager of International Sales and Marketing, reporting to Mr Goodacre.
27.11 The Tigris Petroleum Corporation Limited (Tigris) is a company registered in Gibraltar. Mr Davidson Kelly is its President. The directors of Tigris are lawyers in Gibraltar and the sole shareholder is a foundation, in the nature of a trust, the beneficiaries of which are relatives of Mr Davidson Kelly's wife.[676] The Tigris Petroleum Corporation Pty Limited ACN 094592793 (Tigris Australia) is a company limited by shares incorporated in Australia, and has Mr Davidson Kelly as its sole director and secretary. All shares in Tigris Australia are owned by Maritimo Investments Limited. Maritimo Investments Limited is another Gibraltar registered company and is ultimately owned by Mr Davidson Kelly. Atlantic Oil and Gas Management Limited is another company associated with Mr Davidson Kelly. It is registered in the British Virgin Islands and chaired by Mr Davidson Kelly. The Managing Director is Mr Taylor.
27.12 It is necessary to set out in significant detail the history of the dealings between BHP, AWB, DFAT, IGB and the UN regarding what has become known as the 'Tigris transaction'.
27.13 Following the commencement of UN sanctions against Iraq and the freezing of Iraq's bank accounts in 1991, until 1995 AWB sold wheat to Iraq on cash against documents basis as Iraq's funds permitted. References to AWB in this chapter are to the Australian Wheat Board until 1989 and thereafter to AWB Limited unless otherwise stated.
27.14 On 26 April 1995 Mr Storey, AWB's General Manager of Marketing wrote to Mr Lawrenson, AWB's Managing Director, concerning a proposed visit to Australia by Minister of Trade, Dr Saleh and IGB Director General, Mr Daoud. The memorandum was copied to the Chairman, Mr Flugge, the Middle East desk and the Manager Policy and Marketing Analysis. The memorandum noted that:
This week we will be applying to the UN via DFAT for an approval to ship up to 250,000 tonnes between now and end 1995. This is something of a 'phantom' contract but necessary for the Iraqis to continue their agenda with the UN in their efforts to buy food. (The IGB clearly understand we have no supplies)[677]
The visit was delayed and ultimately did not proceed.
27.15 On 26 April 1995 AWB wrote to DFAT forwarding a Revised Notification and Authorisation Request Form to export goods to Iraq in respect of 250,000 metric tonnes of wheat. The method of payment stated was 'cash against documents'.[678]
27.16 On 1 May 1995 Mr Gomersall of AWB sent a telex to Mr Daoud concerning arrangements for the proposed visit. Mr Gomersall stated:
On other matters, we understand that the MV Probo Bangor has arrived in Umm Qasr and has commenced discharging. Please keep us informed of her progress and we look forward to receiving payment through our friends in Jordan as agreed.[679]
27.17 On 3 May 1995 the Australian mission to the United Nations in New York wrote to DFAT Canberra enclosing a letter from the United Nations dated 27 April 1995 approving the sale of 250,000 tonnes of wheat by AWB to Iraq, noting that in consequence of the notification to the United Nations and Resolution 687:
…prohibitions against the sale or supply of these shipments and financial transactions related thereto contained in resolution 661 (1990) are no longer applicable.
As regards financing, I wish to draw your attention to paragraph 11 of Security Council Resolutions 778 (1992) which stipulates that 'no further Iraqi assets shall be released for purposes set forth in paragraph 20 of resolution 687 (1991) except to the sub-account of the escrow account established pursuant to paragraph 8 of resolution 712 (1991)'. Under that paragraph, payments to exporters through the direct release of Iraqi frozen assets are prohibited. All other relevant Security Council Resolutions relating to financial transactions regarding Iraq must also be complied with in full. [680]
27.18 On 6 May 1995, the IGB sent a telex to AWB advising it had instructed the Iraqi Commercial Office in Amman to arrange payment of US$589,000 as per their telex dated 2 May 1995 in respect of the Probo Bangor shipment.[681]
27.19 On 8 May 1995, Mr Gomersall sent a telex to Mr Daoud noting that AWB had now 'received copies of the tested telex's from Rafidain Bank London, as well as those telexed by IGB. We are therefore hopeful that we will be able to proceed to payment in the next few days. Again thank you for your help.'[682]
27.20 On 12 May 1995, Mr Gomersall sent Mr Daoud a telex advising of UN approval for the export of the 250,000 metric tonnes of wheat.[683]
27.21 On 10 June 1995, IGB sent a telex to AWB on behalf of the Iraqi Ministry of Trade seeking to work with AWB to establish a joint venture company to provide finance for Iraqi food requirements. The telex suggested that payments for wheat, with interest, would be made in crude oil after the embargo was lifted or by cash when available and would be guaranteed by the State Oil Marketing Organisation (SOMO), or Iraqi frozen assets, or the Central Bank of Iraq.[684]
27.22 On 13 June 1995, Mr Stott of AWB sent a telex to Mr Daoud responding to his telex of 10 June 1995. Mr Stott expressed interest in considering any Iraqi proposal and suggested discussion of it during the proposed visit of Minister Saleh and Mr Daoud to Australia.[685]
27.23 Mr Stott gave evidence that the Ministry of Oil in Iraq initiated a proposal for BHP to fund a shipment of wheat to Iraq.[686] He was telephoned by Mr Daoud in 1995 and asked whether he had heard of a company called BHP. He replied that he had. Mr Daoud telephoned him later in the year and told him that BHP was interested in financing a shipment of wheat to Iraq:
The proposal was at that point that they would finance those cargos and there would be a payment mechanism to be agreed with them to enable the shipment of goods to Iraq.[687]
27.24 On 18 June 1995, Mr Davidson Kelly sent a memorandum to Mr O'Connor, copied to Mr Harley.[688] Mr Davidson Kelly was at that time investigating oil projects for BHPP in Iraq. The memorandum concerned meetings between the 5th and 8th June 1995 held by Mr Davidson Kelly with the Iraqi Oil Minister and his officials. Mr Davidson Kelly noted that:
Although hoping for a quick removal of sanctions, the Iraqis are digging in for the long haul and are seeking ways to provide funds for basic foodstuffs, medicine etc …
Foreign participation in the redevelopment of the oil industry…. would play a part in this strategy. It was made clear that payments or loans in advance of the lifting of sanctions 'for humanitarian reasons' would be much appreciated, and might be part and parcel of any deal.[689]
On page four of the memorandum Mr Davidson Kelly wrote:
They are keen to see further contact established with the Wheat Board. They have a requirement for an immediate consignment of 100,000 tons of wheat, to be delivered against future payment, probably from oil sales.[690]
and on page five:
Work should also proceed on the political issues. To obtain the clear support of the Australian government; to investigate the possibility of constructing an imaginative Humanitarian Aid package, and to resolve the issue of the UK's stance in relation to Iraqi activity falling short of actual trading relationships.[691]
27.25 On 19 June 1995, Mr Davidson Kelly sent a memorandum to Mr O'Connor concerning the project in Iraq and noted that Mr Harley would be coordinating the political aspects.[692] Mr Harley recalled that around this time he was asked by Mr Davidson Kelly to 'explore' with the Government and AWB whether it would be possible to progress the wheat shipment concept.[693]
27.26 On 20 June 1995, Mr Davidson Kelly, in an internal note to Messrs Killion and Taylor advised that 'provision of wheat is critical' to BHPP's ambitions in Iraq.[694]
27.27 On about 20 June 1995, Mr Davidson Kelly initialled a document entitled 'Iraq-A hypothetical case'. He noted 'at least three relatively independent sources "confirming" that in order to progress to a privileged position, some form of early humanitarian aid is suggested.' He outlined a proposal for providing aid on credit in order to afford BHP a privileged position in its dealings with Iraq.[695]
27.28 On 23 June 1995, Mr Harley had a meeting with Mr Storey, then General Manager of Marketing at AWB and Mr Geary, then Middle East Manager of AWB, during which a proposal to provide wheat to Iraq funded by BHPP through AWB was discussed.[696] Mr Harley's note of the meeting mentioned a joint venture proposal to receive payment in oil, a prospect which had been the subject of correspondence between Mr Stott and Mr Daoud earlier that month. At this meeting. Mr Harley was given Mr Stott's name as a future contact.[697] Mr Harley thought he may also have spoken with Mr Pinhorn of DFAT that day. He could not recall any details but believed he may have spoken about what was permitted under UN sanctions.[698]
27.29 On 2 August 1995, Mr Stott sent Mr Daoud an offer for 250,000 tonnes of wheat.[699]
27.30 On 3 August 1995, Mr Stott made a handwritten note on a photocopy of the business cards of Mr Harley and Mr McCallum the International Business Affairs Corporate Manager of BHP:
Came to see RJS [Storey] PAG [Geary] as been to Iraq and close to the Iraq's talked about possibility of funding a wheat sale. Contact when Iraqi's due to visit.[700]
27.31 On 4 August 1995, AWB sent a 'Revised Notification and Authorisation Request Form to Export Goods to Iraq' to Mr Feakes of DFAT for submission to the United Nations. It provided that the method of payment would be cash against documents.
27.32 On 6 August 1995, IGB sent a telex to Mr Stott as follows:
Refering to telephone conversation with Mr R. Salman would like to know the exact quantity requested as donation your prompt reply is highly appreciated.[701]
A handwritten note on the telex reads:
Verbal, Currently under offer[702]
There is a further handwritten note on a second copy of the same telex as follows:
Confidential we are currently under offer to a very reputable third party for a total 100,000 MT.[703]
The handwriting is Mr Stott's.
27.33 On 8 August 1995, Mr Stott telexed Mr Daoud advising:
Further to yesterdays discussions with Mrs Ahlam we have been advised by the other party that they now only want an offer for 10,000 tonnes rather than 100,000. In addition they have lowered the quality specifications in order to allow wheat from some very unusual places to compete. [704]
27.34 Also on 8 August 1995, Mr Davidson Kelly wrote to Mr Saadalla Al-Fathi of the Ministry of Oil Baghdad. He advised that BHPP were continuing to make progress on the question of possible delivery of wheat to Iraq and that he was meeting with Mr Stott of AWB later that week.[705]
27.35 On 14 August 1995, Mr Davidson Kelly sent a note to Mr Taylor marked 'Strictly Private and Confidential' which was copied to Mr Harley. The note concerned the timetable and progress of commercial negotiations of the proposed oil project but also dealt with the wheat shipment:
We are about to commence detailed discussions with the Wheat Board to start the process going, and it is likely that we will be in a position to start deliveries within the next week or so. We will start with a contribution of 20,000 tons or so, which is quite unconnected with the matter in hand! However, to the extent that we are not in detailed commercial discussions makes me feel quite uncomfortable, especially if we are required to step up our aid .[706]
Mr Harley's recollection was that the proposal was not sufficiently advanced to start deliveries that soon. [707]
27.36 On 17 August 1995, Mr Stott sent a fax to Mr Daoud advising of the receipt of United Nations approval for the shipment of:
a further 250,000 metric tons of Australian wheat into Iraq. This authorisation is in addition to the UN approval of 27 April 1995, and brings total tonnage approved to 500,000 metric tons.
In regard to the 10,000 metric tons discussed earlier this week, the donor involved has contacted us today and has deferred the tender until September. I will continue to keep you informed of this situation. [708]
27.37 Between 1 September 1995 and 5 September 1995, Mr Harley recorded in his notebook a discussion with Mr Stott concerning the possible shipment of 25,000 tonnes of wheat.[709]
27.38 A further note made by Mr Harley in the same period recorded:
Iraqi grain board
Grain sales Contract AWB Iraqis
100,000 tonnes FOB $24,000,000
tranches
$5M worth
Oil repayment contract
Draft of a central bank guarantee
L of C
Industry Minister
Grain Board Representative [710]
Mr Harley's evidence was that he could not recall the conversation or meeting recorded in the note but concluded from the text that it recorded a discussion with Mr Davidson Kelly concerning a conversation Mr Davidson Kelly had had with Mr Stott.[711]
27.39 On 19 September 1995, Mr Davidson Kelly and Mr Harley sent a memorandum to Mr O'Connor, which only Mr Davidson Kelly signed. The memorandum recommended purchasing a letter of credit to be issued or backed by the Central Bank of Iraq in favour of the Australian Wheat Board for US$5 million. The letter of credit was to be redeemable in either oil or cash no later than 2000, bearing an interest rate of 10% per annum. It noted the transaction would equate to approximately 20,000 tonnes of wheat:
The purpose of the transaction is to establish favour with the Government of Iraq in anticipation that sometime prior to 2000, the LOC may be exchanged with the Government of Iraq for a down payment for entry into the HCF concession. However, no certainty exists in this respect.
The transaction complies with the terms of the United Nations embargo on Iraq because the Australian Wheat Board has an exemption for this wheat sale and our arrangement is a back to back financial agreement. The LOC will only be settled in oil if the embargo has been lifted. The most significant risk taken with this proposal is that a new regime takes control in Iraq that will not honour obligations.
The value of the LOC will have to be assessed annually and any diminution will be written off against profits. The worst case is that the US$5 million will have to be written off completely in which case it will be deductible against income .[712]
The 'HCF concession' is a reference to an interest BHPP wished to acquire in the Iraqi Halfayah oil field.
27.40 A note was prepared for the board of AWB marked 'Supplementary Managing Directors Report for verbal presentation'.[713] The note is undated; however, Mr Stott gave evidence that he prepared it in 1995 for Mr Storey, who passed it on to his manager, Mr Lawrenson.[714] The supplementary report contained the following:
BHP is keen to keep the following transaction confidential.
…
Background
BHP have decided to make a USD 5 million humanitarian food donation to Iraq. However, they are concerned that the American Government may apply pressure via their North American interests if they were to become aware of the transaction. Therefore, BHP don't want to be recorded as principal in the contract.
Structure of Transaction
The AWB will negotiate and sell to the IGB wheat to the value of USD 5 million. The IGB will open an L/C in favour of the AWB which provides for payment no later than 5 years from the date of sale. The IGB will either pay cash or deliver oil to the value of the L/C in substitution for cash if UN restrictions on Iraqi oil exports are terminated within the 5 year period. The AWB will assign its payment and oil receipt rights under the L/C to BHP. In return for this assignment BHP will pay the AWB USD 5 million cash on bill of lading date. The AWB will use reasonable endeavours to assist BHP in obtaining recovery but apart from this undertaking the AWB is not exposed to any ongoing risk.
The AWB has approval from the UN to sell wheat to Iraq.[715]
The document noted the author's belief that BHP was making the 'donation' in hope of gaining preferential treatment to obtain oil exploration licences once UN sanctions were lifted. Enclosed were a contract between AWB and BHP, a contract between IGB and AWB, a draft Letter of Credit for the Central Bank of Iraq and an oil supply agreement between IGB, SOMO and AWB.
27.41 On 20 September 1995, BHP Legal Group sent AWB a draft CIF contract between AWB and IGB[716], an oil supply agreement between IGB, SOMO and AWB[717], and a draft Letter of Credit to be issued by Central Bank of Iraq.[718] It also sent a letter to Mr Stott setting out the proposed arrangement between the parties.[719] The letter set out the commercial arrangement according to previous documentation but proposed BHP Development Finance Ltd as the purchaser of the letter of credit.
27.42 Mr Harley produced a document entitled 'Corporate Development Projects Status Report as at 25 September 1995.' It recorded that the next meeting to review the Halfayah project would be in London on 5 October 1995 followed by a meeting in Baghdad on 20 October 1995. It estimated the net present value of that project at more than $400 million and noted that Mr Davidson Kelly and Mr Killion had conduct of the matter. It noted: 'Documentation with Charles Stott sent to Baghdad for approval.'[720]
27.43 On 26 September 1995, Mr Stott telexed Mr Daoud advising:
further to our recent discussions i am pleased to advise that your friends have allocated a total of usd 5 million enabling us to conclude the first shipment subject to somo, igb and cbi agreeing to the contract terms that were faxed to you.
we are also talking to another party about a 10,000 tonne parcel. if these 2 quantities can be combined in the one shipment then we should be able to reduce the freight cost by about usd 4 per tonne.
have you had any luck in confirming if the other party is proceeding with the 10,000? at this stage under this payment arrangement we only have usd 5 million available.
i would be pleased to provide a 100,000 tonne offer for your consideration however would you please confirm what payment mechanism will apply for the extra tonnage.[721]
Before sending this telex, Mr Stott cleared it with Mr Davidson Kelly in the following terms:
Norman, all the doc's went through to Baghdad last night and today received a telex from the IBG requesting we submit a 100 kmt offer. we intend, subject your green light that everything is ready to go, to provide the following offer. I also need to discuss with you the BHP/AWB contract and in particular who signs on BHP's behalf. My No 1 wants it signed by No 1's on both sides. let's discuss .[722]
27.44 On 27 September 1995, a file note from Mr Storey to Mr Stott advised that the BHP contract was acceptable to the AWB Board and that Mr Lawrenson would like to sign off on the contract. It noted Mr Lawrenson was advised it may be some time before the agreement was completed.[723]
27.45 On 27 September 1995, a draft letter was prepared for signature by Mr O'Connor. The reference on the document, 'ndk:cr ndk 412' indicates Mr Davidson Kelly was the author. It read:
LETTER OF CREDIT
This transaction requires approval by BHP Development Finance Ltd.
It is recommended that US $5 million be spent to purchase a Letter of Credit (LOC) to be issued or backed by the Central Bank of Iraq in favour of the Australian Wheat Board. The LOC is redeemable into either oil or cash no later than 2000 and bears an interest rate of 10% per annum.
This transaction will cause the Australian Wheat Board to ship about 20000 tonnes of wheat to Iraq.
The purpose of the transaction is to establish favour with the Government of Iraq in anticipation that sometime prior to 2000, the LOC may be exchanged with the Government of Iraq for a down payment for entry into the HCF concession. However, no certainty exists in this respect.
The transaction complies with the terms of the United Nations embargo on Iraq because the Australian Wheat Board has an exemption for this wheat sale and our arrangement is a back to back financial agreement. The LOC will only be settled in oil if the embargo has been lifted. The most significant risk taken with this proposal is that a new regime takes control in Iraq that will not honour obligations.
The value of the LOC will have to be assessed annually and any diminution will be written off against profit. The worst case is that the US $5 million will have to be written off completely in which case it will be deductible against income.[724]
27.46 On 28 September 1995, IGB telexed AWB accepting either 20,000 tonnes at a certain price per tonne or 30,000 tonnes at a lower price per tonne, on CIF free out terms. The contract was assigned number A2630.[725] Transactional documents bearing that contract number and date and providing for payment by a letter of credit payable in 5 years by cash or oil and attracting 10% interest were prepared by AWB.[726]
27.47 On 29 September 1995, Mr Stott sent an offer to the central tenders committee of Iraq's State Purchasers Department offering to supply 1.5 million tonnes of wheat. The offer contains the special condition (at paragraph 8):
if the tonnage is for destination Iraq, the execution of the contract is 'subject to UN approval'. Please note we already have UN approval in place to ship 1,000,000 tonnes to Iraq. [727]
The same day Mr Stott also wrote to Mr Daoud to finalise details of the type of oil Iraq was to supply under the proposed Oil Supply Agreement. [728] He noted on his copy of the letter that he was to clear the response with 'BHP' when received.
27.48 On 29 September 1995, Mr O'Connor wrote to BHP's Managing Director, Mr Prescott in the following terms:
IRAQ
We have been considering for some time the provision of Humanitarian Aid to Iraq, in an attempt to alleviate the conditions of extreme hardship which have been caused by the application of International Sanctions.
Discussions have taken place with the Australian Wheat Board, which has continued to trade with Iraq under procedures which are in accordance with UN Sanctions, and also with the National Australia Bank. It has been determined that BHP could lawfully finance a cargo of wheat to be delivered to Iraq, by effectively making a loan to the Iraqi Grain Board. The loan, of US$5 million, would finance a cargo of 20,000 tons of wheat which would be delivered in the normal course of business by the Australian Wheat Board. The loan, carrying an interest rate of 10% per annum, and guaranteed by the Iraq Central Bank, which would be repaid in cash after 5 years, or in oil within 3 months of UN Sanctions being lifted. The Australian Wheat Board would enter into the agreement with the Iraqis, and assign its obligations to BHP Development Finance.
The cost would be provided from BHPP's exploration budget for 1995/6, and decisions on the carrying value of the loan would be taken at each year end. BHPP is currently in serious negotiations with the Iraq Oil Ministry for a substantial oilfield development project, and it is believed that this contribution of humanitarian aid would advance our interests in this regard.
However, it must be recognised that there is no guarantee that any concession will be awarded to BHPP, nor is there full confidence that the loan, despite the Government Guarantee, will be repaid in full. Hence the cost of the loan will be treated as high risk exploration expenditure, which may or may not prove fruitful.[729]
27.49 On 4 October 1995, Mr Stott telexed Mr Daoud seeking a response to the fax of 29 September 1995 enquired about a further 10,000 tonnes to be funded by 'your friends'.[730] On 5 October 1995, Mr Daoud replied providing details of oil type requested. He further advised 'with regard to 10,000 mtns we have not got the respond yet will inform you soon' and 'Have you more information about the offer of 1.5 million ton from our friends.'[731] Mr Stott faxed the telex to Mr Harley and noted:
They [IGB] are keen for everything to proceed. Are there any developments your end.[732]
This was sent on 9 October 1995.
27.50 On 6 October 1995, IGB telexed AWB advising it had the full authority from the Iraqi Government, SOMO and the Central Bank of Iraq to sign the contract and noted:
… we are ready at your convience to receive your delegation to sign the full agreeement for the whole operation that covers the value of 100,000 mt of a wheat.
As for the first cargo and inspit we could not receive a reaction from the friends about the 10,000 mt.
Lpppls proceed with the shipma of the quantity that covers only the value of U.S 5m.[733]
27.51 In an undated telex to Mr Stott, Mr Daoud referred to the telex of 6 October 1995 and advised receipt of 'approval of 10.000 mt wheat from our friends' please 'act accordingly to increase the agreed wheat cargo'.[734] Handwritten on the bottom was 'Norman Davidson Kelly to Baghdad?'[735]
27.52 On 9 October 1995 Mr Harley wrote to Mr O'Connor:
Graham Evans + I are jointly testing an Australian Govt. angle to the Iraq project.
I tested my idea on Graham who is researching some aspects for me. John Prescott had separately consulted Graham on the project last Friday.
I have fully briefed Graham who may raise aspects of it with you in Canberra on Tuesday.
When his tests are [d]one we may make an informal approach to the Government on Wednesday via a contact of mine. This will depend on our research.
TSH[736]
Mr Evans was BHP's Director of Government and External Affairs. Mr Harley could not recall the content of the briefing, the proposal or how or on whom it was tested. He did not recall any discussion with Mr Prescott. [737]
27.53 In an undated note from Mr Harley to Mr O'Connor he discussed what he discerned to be Mr Prescott's objection to the proposal, namely that the 'goodwill' payment was akin to a bribe, or that BHP was aiding an international pariah.[738] He noted that 'If his objection is that it is a bribe then I think there are some good arguments that can be mounted that it is an ethically justifiable payment albeit unusual.'[739] Mr Harley noted there was no point in either officially or unofficially approaching the Australian Government before BHP was clear on what it would countenance. The note was followed by a draft press release and a series of discussion points in the event that the proposal became public.[740] Mr Harley took the date of the note to be 9 October 1995.
27.54 On 12 October 1995, Mr Davidson Kelly sent a memorandum marked 'Private and Confidential' and 'URGENT' to Mr O'Connor, copied to Mr Harley.[741] The memorandum was entitled 'Project Italy' which was the BHPP code name for Iraq.[742] Mr Davidson Kelly noted that delays in providing the wheat may prejudice negotiations to secure access to a major oil field. He advised:
The form of the documentation, the purchase of an Italian Letter of Credit in support of a 5 year loan to the AWB, was made to ensure the distancing of BHP from the transaction, with the benefit of managing any potential write off over time and at our discretion. In the event of the award of a project this obligation from the Italians could have been regarded as the prepayment of part of a normal signature bonus. Hence we would have our cake and, hopefully, eat it too.
In the event that further 'distance' from the aid package is required, and/or further comfort from the Government is required, this will result in an increase in the cost to us of the package (the possibility of recovery will be more remote). Also, more time will be required to complete the necessary discussions.[743]
Mr Davidson Kelly advised that the Iraqi oil project negotiator was seeking some assurance that the wheat deal would proceed. He wrote:
Although it has been clearly understood by all parties that there can be no connection between the Aid Package and our deal, the absence of performance on the former is unquestionably going to impact unfavourably on our ability to negotiate the latter.[744]
He later wrote: 'Cancellation of the Aid Package would, I believe, prove to be a major and possibly fatal setback.'[745] He sought confirmation that BHP intended to proceed with the wheat transaction. [746] It is clear that the statements asserting the wheat transaction and the oil arrangement are not related, were cosmetic. It was known and accepted that the two transactions were inter-related.
27.55 On 16 October 1995, Mr Davidson Kelly sent a memorandum to Mr O'Connor marked 'Private and Confidential', copied to Mr Harley.[747] Mr Davidson Kelly argued the benefits of the proposed transaction and noted:
The proposed mechanism for making the contribution has been to work directly with the AWB, who have negotiated the shipment directly with the Italians in the normal course of their business, and under normal procedures, save that credit terms acceptable to ourselves, and the NAB, have been agreed.
Quite apart from the financial advantages of this route, which provides a sporting chance that our contribution will be repaid within the next five years in cash or, more likely, oil, there is one other major advantage. No other party is aware of the transaction. Knowledge is limited to the AWB, the Italians and ourselves.
Although other mechanisms might be found to distance ourselves from the transaction they will involve us in introducing third parties to the deal, with an increase in the potential for unwelcome leaks in what is clearly a sensitive commercial transaction.[748][emphasis in original].
The memorandum attached a note from Mr Harley of seven pages on public relations issues arising from the proposed dealing with Iraq.[749]
27.56 Mr Harley produced a further project status report concerning the Halfayah project as at 18 October 1995. It recorded: 'Documentation with Charles Stott approved. Awaiting instructions' and that Messrs Harley and O'Connor were the staff responsible for that aspect.[750] Mr Harley thought the pending instructions were likely to be those of BHPP.[751]
27.57 On 23 October 1995, the Tokyo office of AWB faxed Messrs Officer, Stott and Storey concerning a proposal that Mitsubishi acquire wheat for Iraq. It noted that IGB was to be the principal to the contract and that Mitsubishi would not be lifting oil or gas in return but that its incentive was 'longer term friendship'.[752]
27.58 On 24 October 1995, Mr Prescott endorsed on the 16 October 1995 memo from Mr Davidson Kelly to Mr O'Connor, 'Mr O'Connor I would agree provided we proceed via Dept of Foreign Affairs and gain UN Sanctions Cttee approval'.[753]
27.59 On about 25 October 1995, Mr Harley made a record of his conversation with Mr Feakes of DFAT. He noted Mr Feakes had told him it was lawful to sell wheat but that Iraq must pay in cash and was not allowed to pay by way of frozen assets. He believed he informed Mr Stott of the negative response of DFAT.[754]
27.60 On 26 October 1995, Mr Stott wrote to Mr Feakes advising the following overview of the proposed transaction:
The AWB will negotiate and sell to the IGB wheat to the value of USD 5million. The IGB will open an L/C in favour of the AWB which provides for payment no later than 5 years from date of sale. The IGB will either pay cash or deliver oil to the value of the L/C in substitution for cash if UN restrictions on Iraqi oil exports are terminated within the 5 year period. The AWB will assign its payment and oil receipt rights under the L/C to Ex Co.
In return for this assignment Ex Co will pay the AWB US 5 million cash on bill of lading date. The AWB will use reasonable endeavours to assist Ex Co in obtaining recovery but apart from this undertaking the AWB is not exposed to any ongoing risk.
The AWB has approval from the UN to sell wheat to Iraq. [755]
27.61 On 27 October 1995, Mr Feakes prepared a minute for Mr Laurie, acting Deputy Secretary of DFAT, through Mr Bowker, acting Assistant Secretary Middle East and Africa Branch of DFAT.[756] The minute concerned the proposed wheat sale and associated financial transactions. Mr Feakes recorded that he had been present during a conversation between the Secretary and BHP and that the proposal outlined by BHP was that it would pay AWB to supply an amount of wheat to Iraq as a gift. He noted his subsequent contact with Mr Stott and receipt of the proposal referred to above. He noted Mr Stott proposed to use a previous approval of the United Nations on the basis that the BHP arrangement could be described as a 'cash against documents transaction',[757] the only difference being that the cash was coming from a source other than the purchaser. Mr Feakes and DFAT Legal Office took the view that the proposal could not come within the previous UN approval and that a new authorisation request setting out the actual method of payment would be required. Mr Feakes noted there was little prospect the Sanctions Committee would approve such a proposal.
27.62 On 27 October 1995, Mr Harley recorded speaking with Mr Stott who advised the transaction involving payment via a third party was 'not on'. He then spoke with Mr Bowker who he believed confirmed that a third party payment was 'not on'. It was noted that humanitarian gifts and cash donations were consistent with sanctions.[758] Mr Harley recalled it was 'likely' he told Mr Davidson Kelly of DFAT's view. He had a specific recollection of telling Mr O'Connor at about that time that DFAT would not approve a credit based wheat shipment but would approve a gift based shipment, and of Mr O'Connor approving proceeding with the shipment as a gift.[759]
27.63 On 27 October 1995, Mr Feakes again wrote to Mr Laurie noting the Secretary had spoken with him about other means of BHP funding a wheat purchase.[760] It was noted a gift could be made through Care Australia and that this would not require the involvement of the Australian Government. Mr Feakes raised the concern that assisting BHP, whose motives were commercial rather than humanitarian, might adversely affect the Commonwealth.[761]
27.64 On 30 October 1995, IGB wrote to AWB urging it to progress the transaction.[762]
27.65 An undated file note of Mr Stott's recorded a discussion with Mr Feakes and Mr Bowker noting:
27.66 On 30 October 1995, Mr Bowker wrote to the DFAT Secretary, Mr Costello, copied to Mr Laurie and Mr Skelly.[764] He advised that BHP could make a gift for humanitarian purposes and that DFAT was not obliged to scrutinise the 'activity or motives of the company'. He noted that customs and the Reserve Bank would both need to satisfy themselves as to the purpose of the shipment, and that the United Nations would have to be advised, and approve, a proposed gift and that if disclosure of BHP's involvement was a risk, but an unacceptable one, then the donation could be made through Care Australia or the Iraqi Red Crescent. The Secretary noted on the minute: 'noted - please advise Senator Evans. Tell BHP I am available to discuss it this week'.[765]
27.67 Later on 30 October 1995, Mr Bowker sent a further minute to the Secretary advising that the proposal for a wheat shipment on credit terms had been extensively discussed with Mr Stott, Mr Harley and Mr Engel of AusAid.[766] He advised his belief that there was no prospect of UN approval of the arrangement as it would 'make a nonsense of sanctions'. Mr Bowker advised that Mr Stott had claimed to DFAT, and led BHP to believe, that DFAT had previously allowed such proposals to go forward where AWB deals with Iraq had been financed by third parties including Libya, Japan and Korea. He noted Mr Stott had claimed that such third party arrangements had been approved by the United Nations but that DFAT could find no evidence to support that contention either on file or from the recollection of officers concerned. He stated: 'Frankly, we do not believe him'. Mr Bowker stated that the United Nations had approved sales to Iraq on the basis of cash against documents and that DFAT was unaware that AWB was being paid using the funds of third parties in earlier transactions. He noted this had not been made known to the UN Sanctions Committee. He noted Mr Harley had been attracted to providing wheat because the amount loaned might be recoverable, but that BHP was prepared to make a donation if it had sufficient commercial reason.[767]
27.68 On 31 October 1995, a cable was sent to the Foreign Minister, Senator Evans, to update him on the matter.[768] It advised that it was proposed to advise BHP that a gift of wheat to Iraq for humanitarian purposes, arranged through a reputable charitable institution, would be consistent with sanctions. It noted AWB had argued that the proposal was not an extension of credit, even though a Letter of Credit redeemable in 5 years or after the lifting of sanctions was involved. It noted BHP and AWB had been advised that the method of payment proposed would contravene sanctions. It reiterated the advice in the above minute to the Secretary.[769]
27.69 On 1 November 1995, AWB faxed to Mr Skelly, following a discussion with Mr Stott that day, a copy of the telex of 30 October 1995 from the IGB.[770]
27.70 On 6 November 1995, Mr Skelly, acting Assistant Secretary Middle East and Africa Branch of DFAT, wrote to Mr Stott and advised that there were three ways Iraq could pay for humanitarian goods.[771] These were by payment in cash, by Iraq agreeing to transfer its frozen assets into the escrow account, or by Iraq agreeing to accept UN Council Resolutions 706, 712 and 986 which are the oil-for-food resolutions. He stated:
Proposals whereby Iraq agrees to repay debts against the promise of future oil sales are not acceptable to the Sanctions Committee nor are transactions involving the payment for humanitarian goods by third parties. Neither of these payment methods would be compatible with the underlying policy of the sanctions regime, namely, to pressure Iraq into using the oil-for-food resolutions and thereby to use its wealth to approved ends.[772]
He noted that permission to export could be denied if the Minister or his delegate was of the view that the method of payment, including the sourcing of the funds to be received in payment, would involve a breach of sanctions. [773]
27.71 On 9 November 1995, Mr Stott endorsed on the letter of 6 November 1995 a note to Mr Lawrenson and Mr Storey stating:
Prescott BHP raised the BHP/AWB transaction with Gareth Evans. Whilst he was supportive he suggested BHP discuss the transaction with his department. The AWB outlined the structure of the transaction to DFAT. DFAT have subsequently said that the transaction as proposed is in their interpretation a breach of UN sanctions. This decision has far reaching ramifications for our Iraqi business. All our payments for Iraq shipments are received via third parties and DFAT was aware of this (although DFAT officials claim now they were not aware of this). The bottom line is that we will not be able to do any more business to Iraq. BHP are concerned that they may have destroyed our Iraqi business and have therefore offered to provide the AWB every assistance, including international legal help, to turn the decision around. We have kept the Iraqis fully informed and have asked the IGB for approval to ask the UN via our government, the following question: 'Can the AWB sell wheat to Iraq for humanitarian purposes and receive cash payment for the goods via a third party?' If the answer to the above is positive then our problems are solved. However, if negative then we will need to rethink our strategy. In the meantime the AWB/BHP are trying to rework the transaction using AusAid/WFP as the clearing mechanism' .[774]
27.72 On 9 November 1995, Mr Stott telexed Mr Daoud seeking his permission to ask the UN the question raised in his file note above.[775] The telex was resent on 10 November 1995.[776]
27.73 On 16 November 1995, DFAT sent a cable to its New York mission, copied to the embassy in Amman, reiterating advice given to AWB and asking the mission to raise with the Sanctions Committee their views as to:
(1) whether food stuffs for humanitarian purposes can be purchased by a third party and provided as a gift to Iraq?
(2) whether food stuffs for humanitarian purposes can be purchased by Iraq entering into a credit arrangement with the supplier or third party with Iraq agreeing to pay for the food stuffs some time in the future?
(3) could such a credit arrangement be legitimised if it is made conditional upon the debt being realisable only after sanctions have been lifted. [777]
27.74 On 16 November 1995, Mr Stott faxed Mr Skelly a notification form for the export of 100,000 metric tonnes of wheat to Iraq for submission to the UN. The attached form stated the method of payment to be 'cash payment to be received through third parties'.[778] DFAT requested Mr Stott wait until their cable had been answered before submitting the notification.
27.75 On 20 November 1995, Mr Stott telexed Mr Daoud advising: 'I understand that our usd 5 million friends may have discussed with their Baghdad contact, the mechanism that we explored last week.'[779] Mr Stott advised that he was awaiting a response to DFAT's request of the United Nations in relation to the arrangements they had been discussing.
27.76 On 22 November 1995, Mr Stott advised Mr Daoud that following further discussions with DFAT it had now been decided to proceed with a 100,000 tonne application on the basis of 'cash payment to be received through third parties.'[780]
27.77 On 1 December 1995, Mr Feakes faxed Mr Stott advising that the United Nations had approved the 100,000 tonne application and enclosing a copy of that approval dated 28 November 1995.[781] It approved the notification to the United Nations which stated: 'cash payment to be received through third parties.'[782] Mr Stott forwarded the fax to Mr Harley on 4 December 1995 and noted: 'Looks like all systems go.'[783]
Mr Harley recorded in his notebook sometime in the period 23 November to 5 December 1995 a conversation with Mr Feakes.[784] He noted that DFAT were reluctant to write but that BHP was 'free to do it'. Mr Harley's evidence was that this was a reference to the donation proposal.[785]
27.78 On 5 December 1995, Mr Stott telexed Mr Daoud advising 'we expect to receive the green light from our 5 mill friends soon.'[786] Mr Stott proposed a new price for the cargo.
27.79 On 5 December 1995, Mr O'Connor wrote to Mr Prescott a memorandum advising that DFAT had stated BHP was free to pay the AWB for the supply of wheat to Iraq and proposing that BHP proceed as soon as possible on a 'straight forward grant basis'.[787] Mr Harley believed he may have drafted the memorandum, at least in part.[788] Mr Prescott noted 'okay to proceed' on the memorandum on 9 December 1995.[789] Mr Prescott gave evidence the shipment was intended to be a gift.[790] He said:
I did not believe or understand that the grant approved by me was a loan to Iraq. There was no obligation on Iraq to repay any amount to BHP. I did not approve any loan by BHPP to Iraq. My understanding at the time was that BHP had agreed to make the payment to build relationships with Iraq in order to seek to position itself favourably for possible access to oil projects, upon the lifting of the UN sanctions. I did not understand that the payment created any obligation on the Iraqis.[791]
27.80 On 5 December 1995, Mr Stott advised Messrs Lawrenson and Storey that UN approval on the basis of 'cash payment to be received through third parties' had been received.[792] He advised:
… the BHP transaction structured slightly differently, is now able to proceed…
… Under the old mechanism the IGB was to open a 5 year deferred payment L/C in favour of the AWB. The IGB was to pay cash or deliver oil in substitution for cash if UN restriction on oil exports were terminated. The AWB was to assign its payment and oil receipt rights to BHP and in return the AWB would receive cash from BHP on bill of lading date.
The new mechanism, which is still to be negotiated with BHP, should simply be COD. BHP will then be left to make its own arrangements with the Iraq's.[793]
27.81 Mr Stott proceeded to negotiate delivery and terms with Mr Daoud, who on 14 December 1995 forwarded a contract, number A2741, to AWB for execution.[794] The contract did not note or specify the involvement of BHP, and recorded a direct sale from AWB to the IGB. That contract was executed by IGB. Mr Stott completed an export sales note on 15 December 1995 again showing the buyer to be IGB.[795]
27.82 On 20 December 1995, Mr Stott wrote to Mr Harley advising that AWB had fixed the Ikan Sepat to carry the wheat. He proposed that BHP confirm payment to be by cash against their invoice which was to be presented after the bill of lading date.[796]
27.83 On 21 December 1995, Mr Stott wrote to DFAT seeking the appropriate customs permission for export of the wheat.[797] That permission was forwarded to AWB, executed by Mr Feakes as delegate of the Minister, on 21 December 1995.[798]
27.84 Thus, as at December 1995:
27.85 On 3 January 1996, Mr Davidson Kelly prepared a note of meetings that he and Mr Saadalla Al-Fathi had participated in with officials of the Oil Ministry and the Trade Ministry.[800] Mr Al-Fathi was an Oil Ministry official, but also sometimes assisted BHPP. He noted that the meetings had been called at the Iraqis request to discuss progress on the completion of the oil field discussions and to consider the implications of the recent commitment to a grain shipment by BHP. He noted:
The Aid programme, although being discussed separately from the [oil field] contract negotiations is regarded by the Government as crucial to BHPP's success, and hence there is a high degree of eventual linkage between the two. The Iraqis expressed deep thanks for the first cargo (due to be discharged on 14 February) but of course are looking for further progress towards the target of 100,000 tons (about US$25 million).[801]
The meeting with the Trade Ministry officials included Dr Saleh, Minister of Trade, Mr Daoud and Mr Farouk Al Obaidi, Director General External Relations. Mr Davidson Kelly recorded that the Iraqis had expressed gratitude for the cargo and were enthusiastic for further shipments. He said:
The Minister restated their position that the supply of Aid in the form of Wheat and the [oil field] contract discussions were closely interlinked in the mind of the Iraqi Government.[802]
It was further noted:
The position which has been reached is not what had been originally proposed as being the optimal position from the point of view of the Iraqi Government and BHP.
Therefore the first shipment was effectively a gift from BHP to the people of Iraq, permitted by the UN Sanctions Committee. After it had been landed we would resume our discussions with the Australian authorities to try to persuade them that their interpretation was too severe. The IGB offered to provide any information on other precedents which would assist us. This is important as it is clearly understood by the Iraqis that BHPP's permitted budget for donations of this nature is more limited than its ability to finance trade on sound commercial terms. Also the Iraqis are keen to purchase grain, but on deferred payment terms, rather than accept gifts.[803]
There is accordingly no doubt Mr Davidson Kelly knew the transaction was a gift.
27.86 On 15 January 1996, Mr Davidson Kelly wrote to Dr Saleh advising that he was looking forward to the successful landing of the first cargo and that he would be taking up with Australian authorities 'their interpretation of the Sanctions legislation.'[804] He advised he would keep the Minister and the IGB fully informed.
27.87 On 25 January 1996, Mr Skelly wrote to Mr Stott.[805] He advised that the UN Sanctions Committee was prepared to accept export to Iraq of foodstuffs for humanitarian purposes under credit arrangements in light of the worsening humanitarian situation. This was on the condition the debt be realised only after sanctions were lifted and that it did not involve unfreezing Iraq's frozen assets. He advised gifts or donations were considered to be consistent with the sanctions regime and approved on that basis. Mr Skelly advised that the issue concerning payment by third parties required consideration of whether the activities of the third party complied with the relevant Security Council resolutions and whether the government lodging the notification was sponsoring the activities of the third parties.
27.88 Mr Skelly noted that the Sanctions Committee stressed it was 'the responsibility of the state submitting the notification request form to satisfy itself that the proposed transaction would not involve the use of frozen Iraqi assets or the realisation of a debt before sanctions are lifted.'[806] Mr Skelly advised that DFAT considered that the existence of third party payments should be explicitly advised to the United Nations.[807] He made clear that the Minister or his delegate would not grant a permission to export until satisfied in respect of applications by a commercial entity to export humanitarian goods to Iraq that such transactions did not involve the unfreezing of Iraqi assets, or the repayment of debt before the lifting of sanctions.
27.89 On 26 January 1996, 20,833 tonnes of wheat was loaded on the Ikan Sepat and a bill of lading completed.[808]
27.90 Within the AWB documents produced to the Inquiry is a letter to the IGB dated 29 January 1996 enclosing three original copies of the bill of lading, three copies of the bill of lading, the original and six copies of the export invoice, the original and four copies of the AWB certificate of origin, the original and four copies of the Government phytosanitary certificate, the original and four copies of the certificate of weight quality and condition, and a copy of the certificate concerning the vessels age.[809] As the documents said to be enclosed were retained by AWB and later sent to BHPP[810], it is clear this letter was not sent.
27.91 On 30 January 1996, Mr Owen (AWB) sent a fax to Mr Moore (BHP) in Melbourne.[811] In the fax, he referred to settlement of invoice number 01865 and instructed:
Due to the present sensitivity involved with this Country we ask that no mention be made in this regard, in your request to payment to your Bankers.[812]
27.92 Invoice 01865 related to the 20,833 shipment to be paid for by BHPP. The invoice was for an amount of $4,999,920.[813] BHPP replied on 31 January 1996 acknowledging receipt of the invoice and supporting documentation. It advised payment would be made on February 2, 1996.[814] BHPP's payment was credited to AWB's account on 5 February 1996.[815]
27.93 On 13 February 1996, AWB issued a Letter of Indemnity to the owners, managers, master and agents of Ikan Sepat requesting them to deliver the wheat to the IGB without production of bills of lading and indemnifying them against doing so.[816] This makes it clear the bills were not sent to IGB by the letter of 29 January 1996.
27.94 On about 14 February 1996 the Ikan Sepat commenced unloading at Um Qasr.
27.95 It will be observed that the shipment was approved by BHPP, DFAT and the United Nations as a gift or grant and was delivered as such. It follows that neither BHPP nor AWB have misled either the United Nations or DFAT in respect of this transaction.
27.96 On 1 February 1996, IGB telexed AWB accepting an offer for a further 30,000 tonnes to be shipped in February 1996.[817]
27.97 On 2 February 1996, Mr Stott faxed Mr Bowker replying to Mr Skelly's letter of 25 January 1996.[818] Mr Stott enquired whether the proposal for supply on 5 year credit previously raised but rejected by DFAT would be permissible in light of the United Nations advice.[819]
27.98 On 2 February 1996, Mr Harvey (AWB) telexed Mr Daoud confirming the order for 30,000 tonnes and advised:
We would intend to implement a payment mechanism as per the old system, and would be most appreciative for your advice on whether this payment mechanism is ready to proceed.[820]
27.99 On 4 February 1996, Mr Daoud replied:
We confirm payment per the previous manner (i.e. payment effected after vessel arrival to Um Quser) and we need to know your bank name and account number in Australia in order to act accordingly.[821]
Mr Harvey provided these details on 5 February 1996.[822]
27.100 On 8 February 1996, AWB advised it had chartered the Tiger Island to carry the 30,000 tonnes and that the contract was A2803.[823]
27.101 On 11 February 1996, Mr Worthington of BHPP sent a memorandum to Mr Davidson Kelly and Mr Paver advising that he had had an 'off the record meeting' with Mr Al-Fathi the previous evening.[824] He said Mr Al-Fathi had advised that the Chinese National Oil Company and a Korean consortium lead by Samsung were both seeking the same project as BHPP and that the Korean consortium had offered an immediate loan facility to Iraq, on an undefined basis, of US$150-200 million. The loan was available for the purchase of food and other needs. Mr Al-Fathi advised that BHP must, if it was to meet this competition, 'urgently progress the US$25 million wheat transaction which was the subject of discussion with Norman at the last meeting(s) (?)'[825], and arrange a proposal providing for the legal sale on commercial terms of 1 million tonnes of Australian wheat to Iraq regardless of the position on UN sanctions. Mr Worthington also reported that Mr Al-Fathi had told him that the Korean and Chinese offers had the 'overt or covert' support of their respective governments.
27.102 On 12 February 1996, Mr Stott wrote to Mr Bowker advising of the Tiger Island sale stating:
…In line with the UN approval dated the 28 November 1995, we wish to advise that we have chartered a vessel to perform this shipment.[826]
Ms Jorgenson (DFAT) replied on 13 February 1996 that the proposal was under consideration by the DFAT legal area and the UN New York.[827]
27.103 On 14 February 1996, Mr Bowker issued permission to export in respect of the Tiger Island shipment[828]; however, on 19 February 1996, Ms Jorgenson (DFAT) wrote to Mr Stott at AWB advising she had an interim response from the DFAT legal area, was awaiting advice from New York, and hoped to reply to the request that week. Mr Stott faxed a copy of the DFAT advice to Mr Harley and endorsed thereon:
Tom, I spoke to Sue and we appear to again be stuck in the bureaucracy. We need to rethink our strategy i.e. do we wait or do we scale up. Appreciate your thoughts/comments. Charles[829]
Mr Harley said that he did not know what the second sentence meant.[830]
27.104 On 28 February 1996, AWB sent Mr Daoud an offer for 20,000 tonnes of wheat for delivery in March/April 1996.[831]
27.105 On 29 February 1996, Mr Hunter (AWB), who had replaced Mr Stott who had left AWB for BHPP, telexed Mr Daoud in response to a counter offer and wrote:
The Qatar option as previously discussed with Charles Stott may have resurfaced and we would appreciate your advice if this is a possibility. If this is the case this may assist in reducing the overall freight value i.e. the total tonnage 30,000 tonnes, rather than 20,000 tonnes.
We look forward to your advice.[832]
27.106 On 29 February 1996, Ms Carayanides of DFAT's New York mission, sent a cable to Canberra concerning methods of payment under sanctions.[833] She advised that, having consulted with the US mission that the United States would not support terms involving a Letter of Credit repayable in five years as this would involve extending credit to Iraq beyond normal commercial practice. She noted however, that the United States also advised that if the application merely said payment by 'Letter of Credit' it may be that the application would not be blocked by the Sanctions Committee because it did not scrutinise applications as it lacked the resources to do so. The US position was that 'the onus is on the country submitting a notification to be satisfied that the export does not breach UN sanctions', but that if a five year payment term were specified the United States 'would need to ask more questions.'
Ms Carayanides also advised that the position of the United Kingdom mission was similar in that it would be likely to oppose a five year Letter of Credit, but if the time for payment were not disclosed it may well not be questioned. This was stated to be an unofficial position. Like the United States, the UK position was that if the delayed payment terms were stated then it was likely one of the committee members would query it. Ms Carayanides advised other countries took less stringent approaches, but it was clear that the United States and the United Kingdom would not support the 5 year delayed payment if disclosed. She noted a sustained US objection would be sufficient to block the application. She noted: 'the practice, whereby countries stipulate 'letter of credit' (without elaboration) is also convenient for committee members as it avoids them having to carefully consider the legitimacy of the transaction and provides them with cover for not blocking humanitarian exports'.[834]
27.107 On 8 March 1996, Mr Worthington emailed Mr Davidson Kelly (copied to Mr Taylor of BHP) seeking to discuss his recent meetings in Iraq.[835] He noted that BHP must table an offer on its next trip to compete with the Korean consortium. He noted Iraq required a 'loan' of about US$100 million outside of any production sharing agreement and that:
a solution must be found. It obviously will require provision of humanitarian aid and I think we should discuss with the AWB. Perhaps the solution is to let the Koreans (or substitute) attend to this aspect and keep clear of it.[836]
27.108 Mr Stott commenced employment with BHPP on 13 March 1996, reporting to Mr Davidson Kelly.[837]
27.109 On 21 March 1996, Messrs Harley and Lyons attended a day long BHPP Strategy Review of the Middle East, chaired by Mr Davidson Kelly and Mr Samson.[838] At this review Messrs Skelly and Pierce gave a briefing regarding DFAT's view on Iran and Iraq.[839]
The minutes of the Strategy Review records:
Mr Lyons recorded DFAT advising that Mr Saddam was likely to 'be there for the foreseeable future, despite sanctions', because 'the Iraqis were getting around the sanctions in many ways'.[841] He recorded their view that the sanctions were likely to remain unchanged 'due to US views',[842] and advised that 'pushing the envelope' on sanctions was very difficult.[843] He recorded their view that 'Australia has to guarantee to the UN that any transactions we have are within the UN sanctions'.[844] He noted that there was 'not a positive reaction from New York' to BHPP's 'type of proposal'.[845]
27.110 On 26 March 1996, Mr O'Connor wrote to the Iraq Minister for Oil, Mr Amir Mohammed Rasheed, noting that the 'first cargo of grain had arrived safely last month' and trusting 'that this shipment will prove to be the cornerstone of the relationship between BHP Petroleum and the Government of Iraq'.[846] Mr O'Connor also noted BHPP was continuing discussions with DFAT and the sanctions committee to arrange procedures under which additional shipments of humanitarian aid could be undertaken. This letter was drafted by Mr Davidson Kelly. On 28 March 1996, Mr Davidson Kelly faxed the letter to Mr Al-Fathi, noting the original was in the post.[847]
27.111 On 2 April 1996, Mr Stott emailed Mr Harley, Mr Davidson Kelly and Mr Lyons advising that, following a review of the sanctions regime and Australian domestic legislation with Mr Lyons, they spoke to DFAT legal advisers on 1 April 1996 and again put forward the position that sanctions allowed sale of wheat on a letter of credit providing for payment five years from the date of sale or payment of cash or oil earlier if UN sanctions are lifted. Mr Stott also advised that the Iraqis had been unable to pay for the 30,000 tonne shipment recently discharged at Umm Qasr (the Tiger Island shipment). He noted this was a significant event as since the end of the Gulf war all AWB trade with Iraq had been conducted on the basis that if Iraq said they had the funds then the cargo would be discharged without a formal payment arrangement being in place. Mr Stott noted that this 'gentlemen's agreement' had worked well for the past five years.[848]
27.112 On 11 April 1996, Mr Pierce wrote to Mr Officer, then General Manager (International) of AWB, advising that DFAT would in future require written notification from AWB that 'shipments authorised had been dispatched, delivered and paid for according to the terms specified in our notification to the UN Sanctions Committee' and that it would be a condition of the permission to export that 'the terms of payment for the wheat (be) as previously agreed and as previously notified to the UN Sanctions Committee.'[849]
Mr Pierce continued:
The second issue concerns your colleagues' discussions this week in Amman. For the shipment in question, our notification to the UN sanctions committee specified 'cash payment to be received through third parties' and 'cash against documents'. It is hypothetically possible that the Iraqi authorities might seek to vary those terms (perhaps by suggesting partial payment, payment in kind, a letter of credit, or delivery of part of the shipment as a gift against guarantees of further sales). If there were to be any variation proposed we would need your earliest advice in order to consider the implications for our adherence to the sanctions regime generally and our notification of the 'Tiger Island' shipment particularly.[850]
27.113 There is a note of a meeting between Mr Daoud and Messrs Harvey, Long and Owen of AWB on 14 April 1996.[851] The note recorded payment discussion including a proposal that Iraq's bankers make payment to Union Bank of Switzerland (UBS) who would then make the transfer to the AWB account in Melbourne. It mentioned AWB's acceptance of 'the other option' involving ANZ. AWB also agreed to examine options of putting in place a US dollar account in Europe, and noted that AWB would accompany IGB to a meeting with its bankers on 15 April. It was further noted that AWB would arrange for a further shipment of wheat arriving between 10 and 15 May at Umm Qasr and that the parties would meet again to discuss on 15 April.
27.114 On 17 April 1996, Mr Harvey faxed Mr Officer and Mr Hunter to advise the outcomes of the meetings. He noted that options for future payments, 'because of security problems' would each be given a number so that they could freely be discussed in telexes and telephone discussions.[852]
27.115 On 22 April 1996 and 23 April 1996, Mr Harvey produced detailed notes of the meetings in Amman with Mr Daoud and himself, Mr Long and Mr Owen. The payment options were:
Option 1: AWB has USD account in UBS Switzerland;
Option 2: AWB has two accounts in UBS Switzerland,
(a) AUD currency
(b) USD currency
Option 3: AWB Bank has USD account in UBS Switzerland
Option 4: Union Bank Jordan have correspondent bank in Australia with USD account;
Option 5: per 'Tiger Island' payment.[853]
27.116 In the report of 23 April 1996, Mr Harvey noted that the Tiger Island problem, namely, how IGB was to pay AWB for the shipment, arose from a refusal of IGB's Jordanian bankers to accept US dollars in cash for payment of the shipment.[854] This was suspected to be because of the deteriorating political relationship between Iraq and Jordan. It appeared IGB had physically transferred the cash to Jordan and offered to give the cash to AWB representatives. Ultimately, the money was deposited with a new bank in Jordan (the Union Bank) which transferred the money to a correspondent bank in Europe, which converted the money into Australian dollars, and transferred it to AWB's Commonwealth Bank account in Melbourne. The Iraqis agreed to consider an interest claim for delayed payment. The note also recorded that when Iraq adopted UN resolution 986, Iraq would return as a wheat buyer with a demand of approximately 160,000 tonnes per month.[855]
27.117 On 22 April 1996, the Iraqi Deputy Minister of Oil wrote to Mr O'Connor thanking him for his letter of 26 March 1996.[856] The Deputy Minister expressed his hope that additional shipments of grain could be made in the near future. He wrote that he expected more progress on the oil field development could be expected to be made on BHP's next visit.[857]
27.118 An undated confidential file note of BHPP, recorded a visit from 18 to 25 April 1996 of BHPP representatives to Iraq during which they met with officials of the Ministry of Oil, the Ministry of Trade and the Ministry of Industry.[858] The note recorded the Minister of Trade advising BHPP that 'Australia's excellent reputation was currently being tarnished by our government's non preparedness to support/submit the proposed payment mechanism which according to their [Iraq's] interpretation is totally in accordance with UN sanctions' and other countries were shipping grain to Iraq on credit terms. The Minister was not prepared to advise details. The BHPP team advised the Minister that before BHPP could contemplate any further shipments, some progress had to be made with their oil field discussions. The note also recorded a private discussion between Mr Stott and Mr Daoud in which Mr Daoud said that, whilst Iraq was actively pursuing the same deferred payment mechanism with other persons interested in the oil development, the only one which had fulfilled a grain delivery commitment was BHPP. It noted Mr Daoud was keen to have a formal payment mechanism in place 'along the lines previously discussed.'
27.119 It also recorded that BHPP commissioned Mr Al-Fathi, a senior Iraqi official, to inform Mr Richardson (DFAT) of the Iraqi Minister's concerns about deferred payment. The note recorded that the BHPP delegation successfully tied the possibility of future grain shipments to a commitment on the oil project. It noted Mr Al-Fathi lobbied for a commitment on the loan for wheat purchases and that, in his opinion, this would be the catalyst for 'project capture'. The note recorded follow up actions to include Mr Stott raising with DFAT the oil field competitor's ability to gain governmental support for credit terms and to unblock 'the current payment arrangement'. He was also to contact AWB to reaffirm its support of the proposed payment mechanism.[859]
27.120 On 30 April 1996, Mr Harvey replied to the fax of 11 April 1996 from Mr Pierce to Mr Officer.[860] AWB confirmed that the Tiger Island shipment had been dispatched, delivered and paid for according to terms specified in the notification to the United Nations. The letter also noted AWB was awaiting a formal response to its proposal to accept payment by way of five year Letter of Credit.
27.121 On 1 May 1996, Mr Harvey wrote to Mr Daoud and advised that the interest claim for the Tiger Island was US$45,430.23 and that, if accepted it would be written off against despatch owed to IGB.[861] The telex also noted that option 4, as discussed on 22 and 23 April 1996 in Amman, was AWB's preference.
27.122 On 2 May 1996, Ms Jorgensen (DFAT) prepared a minute to Messrs Pierce and Skelly in respect of a proposed meeting with Messrs Stott and Lyons later that day.[862] Her notes of the points for the meeting included:
3. Methods of Payment
The Australian Government, through the Reserve Bank of Australia, facilitated the sale in 1992 of 900,000 tonnes of wheat to Iraq with payment in gold. Sales since that time have been made with payment in cash i.e. cash against documents. The submission by Mr Stott of the proposal to involve third parties and a five-year letter of credit led us to seek advice from UN New York about acceptable methods of payment. We were advised that the Sanctions Committee routinely accepts credit arrangements for the provision of humanitarian goods to Iraq provided that frozen Iraqi assets are not used, and provided that the debt is realised only after the sanctions regime has been lifted. Committee members also apparently 'understand' that a letter of credit can include cases where Iraq undertakes to repay debts against the promise of future oil sales once sanctions are lifted. Member states must be satisfied that third party arrangements do not contravene the sanctions regime and do not involve illegal methods of payment. A government which submits a third party notification would be seen to be sponsoring the activities of the third party. (NB the Sanctions Committee operates on an evolving practice basis without detailed operational guidelines and relies to a great extent on the good faith of member states).
Determined to seek UN approval for a third party arrangement, Mr Stott through DFAT, submitted an application to the Sanctions Committee with payment details of 'cash payment to be received through third parties/cash against documents' which was subsequently approved. Two shipments of wheat have proceeded under this approval, apparently without third party involvement. A further 46,000 metric tonnes of wheat can be exported to Iraq using this approval.
However, when we put the actual AWB/BHP proposal to the UN New York for comment from their Sanctions Committee contacts, the response was that the US and UK had 'difficulties' with it. The US was most negative and saw the promise of present or future oil sales as breaching UNSCR 661, and that letters of credit should assume 'normal commercial practice' (but admitting that the Committee did not have the resources to look behind every 'letter of credit' application). The UK was also likely to look negatively upon such a proposal. NAM contacts were more flexible. A sustained US objection to the proposal would be enough to block it. Questions would then be raised with the Australian Government and details would need to be revealed.
The legal opinion of the IOL to the proposal is that the credit arrangement should have a condition that the letter of credit is only realisable after the sanctions regime has been lifted. This would avoid any breach of para 11 of UNSCR 778. In addition, the application form sent to the Sanctions Committee should clearly state that it is a credit arrangement with a third party purchasing the letter of credit from AWB.[863]
27.123 Ms Grant-Thomson, a lawyer with DFAT, gave evidence that, from about April 1996, she dealt with Messrs Stott and Harley concerning various proposals they advanced for Iraq to pay for wheat shipments.[864] She recalled dealing principally with Mr Stott, mostly by telephone, but recalled Mr Harley attending her meetings with Mr Stott for relatively short periods. Her evidence was that:
The main contact that I had was with Mr Charles Stott from BHP Petroleum who was attempting to alter an arrangement that had previously been approved by the UN Sanctions Committee. Under that arrangement, BHP Petroleum had gifted 20,833 tonnes of wheat to Iraq. Approval was granted by the UN Sanctions Committee on 16 November 1995 for this shipment of wheat. Mr Stott, ostensibly acting on behalf of BHP Petroleum, was attempting to change this gift arrangement into a credit arrangement so that the Iraq Government would pay for this payment of wheat under a credit arrangement. I remember advising on this proposal by BHP Petroleum in the course of our meetings in Melbourne and in numerous telephone conversations with Mr Stott. Mr Stott was constantly and intensely proposing alternative ways of overcoming the fact that BHP had made a gift of wheat to Iraq and was attempting to change this to a credit arrangement whilst maintaining UN Sanctions approval. My advice was that it was unacceptable to change a gift arrangement that had been approved by the UN Sanctions Committee into a credit arrangement.
My recollection is that Mr Stott did not like being told that it was not possible to change the gift arrangement into a credit arrangement. He put pressure on the Department to revise this advice. By 'pressure', I mean that in conversation and meetings in which I was involved, Mr Stott would be forceful in promoting his view and constantly challenged the validity of the legal advice that I was providing on behalf of the Department.[865]
27.124 Mr Stott was not asked about this meeting and did not give evidence about it. Mr Lyons, who took notes of the meeting, said even after looking at his notes, he could not be certain what was said by whom at the meeting.[866] Mr Lyons said in his statement that discussion flowed freely at the meeting about ways in which BHPP might achieve their objective to secure long term letters of credit. One such idea discussed was 'careful and limited wording' of the application to the UN.[867] Mr Lyons could not recall who that suggestion emanated from but said it was discussed openly between BHPP and DFAT.[868]
27.125 On 3 May 1996, Mr Storey emailed Messrs Lawrenson, Officer, Hunter, Harvey and Geary concerning his meeting with Mr Rowe, Deputy Permanent Representative and Ms Carayanides, First Secretary, of the Australian mission to the United Nations in New York, on that day.[869] At item 5 of that note, he recorded:
RE: AWB Approaches to Sanctions Committee
In regard to the apparent increase of bureaucratic involvement from Canberra with our applications, there is no pressure from the UN quarter except that the U.S. and UK hold very strong on their position regarding the Sanction rules. For example, an application stipulating payment by a 'Letter of Credit with up to five-year terms' (a la BHP) would be flatly blocked by the U.S. and UK. An application, however, which stated payment to be by 'Letter of Credit' with no details as to the terms, would probably be approved.
We were advised that other nations clearly provide limited information in their applications to avoid the potential embarrassment of an application being rejected. There is political risk, of course, that should one go down the minimal information route and being subsequently found out, of being branded as a Sanction buster.
The Australian Government will obviously not sanction such an approach.[870]
Mr Storey further noted, at paragraph 9, that the advice of Mr Rowe and Ms Carayanides was pragmatic and that they recognised 'that other nations do deals (e.g., the L/C example above)'. He noted they also mentioned:
… Iran have been pretty accommodating in helping Iraq bust sanctions-strange alliance which the Iraqis don't like but beggars can't be choosers! Cash is flowing for 'black' oil through Jordan, Turkey, etc.[871]
27.126 On 6 May 1996, Mr Pierce wrote to Mr Harvey noting his confirmation concerning the Tiger Island.[872] Mr Pierce advised that DFAT had that day put a submission to Ministers on the issue of AWB's proposed alternative payment mechanism.
27.127 On 6 May 1996, Mr Harvey provided a position paper on Iraq to Mr Officer which was copied to Mr Hunter.[873] He noted that Ms Martin, Mr Goodacre and himself were meeting with DFAT in Canberra on 10 May 1996 to discuss the issues. Mr Harvey noted in the overview that AWB had aimed to position itself as preferred supplier of wheat to Iraq by understanding and accommodating the Iraqis difficulties as much as possible. He noted that the Iraqis were purchasing wheat from elsewhere and that they had alternative payment options offered to them by other countries.
Mr Harvey recited the five year letter of credit proposal for AWB to sell wheat on a five year letter of credit which would then be assigned. He stated in relation to the Ikan Sepat shipment that:
While all parties agreed to the proposal, DFAT then raised concerns about the role of third parties in transactions with Iraq. Given the time restrictions on making a shipment to Iraq, it was decided that the deal would progress with BHP making cash payment to the AWB as agreed without an L/C from the IGB. The risk carried by BHP was an issue between them and the IGB. From the AWB's view, the transaction was cash against documents through a third party.[874] [emphasis in original]
Mr Harvey recommended AWB implement the proposal, lobby DFAT to accept the proposal and work jointly with BHPP and IGB to achieve this.
27.128 On 7 May 1996, AWB received a telex from IGB advising that they were unable to pay interest on the Tiger Island.[875]
27.129 On 13 May 1996, Mr Stott emailed Messrs Harley, Lyons, Davidson Kelly, Taylor and Worthington that DFAT was working on the basis that Iraq would accept resolution 986, and that agreement with Iraq on it was imminent.[876] He noted DFAT was still considering its position on the 'payment/legal issue'.
27.130 On 21 May 1996, Mr O'Connor wrote to the Iraqi Minister of Oil noting that agreement had been reached by Iraq with the UN on resolution 986.[877] On 22 May 1996, Ms Grant-Thompson of the International Legal Division of DFAT and Mr Pierce, met with Ms Martin and Messrs Goodacre and Harvey of AWB, and Messrs Stott and Lyons of BHP, concerning the plans to sell wheat to Iraq against a five year letter of credit after the implementation of resolution 986. Mr Pierce noted that:
…
5. BHP was also prepared (with qualifications) to walk away from the deal, provided they could say to the Iraqis that we have been prepared to entertain the possibility (before 986 intervened) and that we were doing everything possible to develop the trade. BHP would also try to derive some advantage from the fact that, since 986 had been agreed, none of its competitors had done anything comparable to the 20,000 tonnes 'gift'. (Mr Downer's response to the submission stated clearly that we were not prepared to entertain the possibility.) We stated emphatically that no retrospective approvals for the shipments already sent could be permitted.
6. Stott did, however, suggest that he could obtain from the Iraqis some form of side-letter to cover the 20,000 tonnes already shipped. That is, the Iraqis would promise some form of payment in kind (oil, good will) at some unspecified date. Stott asked if we would be prepared formally to be made aware of that proposal, on the basis that BHP might, at some later stage, need some future Ambassador in Baghdad to argue that it should be redeemed, or, if the side-letter were publicised, BHP would need us to fend off a hostile American reaction.
7. In my judgement (and Ms Grant-Thompson's), there is nothing at all for us in giving any form of tacit approval to any such deal. If the deal were publicised, we would be accused of aiding and abetting sanctions busting. The absence of a paper trail, and the lack of any arrangements for payment in kind for the shipment, are not our problem. They are BHP's. The 20,000 tonnes deal is now a closed one, as far as we are concerned, and should remain closed.[878]
27.131 Thus, within two months of commencing with BHPP, Mr Stott was seeking DFAT's approval to convert the Ikan Sepat shipment, approved as a gift, to a commercial loan.
27.132 On 23 May 1996, Mr Pierce wrote to Ms Martin advising that, following their discussions of 22 May 1996, the Ministers for Trade and Foreign Affairs had decided that DFAT could not proceed to put to the sanctions committee the proposal for shipment of wheat against the five year letter of credit.[879]
27.133 On 27 May 1996, Mr Pierce wrote to Mr Harley concerning the meeting of 22 May 1996 with Messrs Stott and Lyons.[880] He advised the Ministers had decided not to endorse the proposal that some wheat be shipped against payment by a five year letter of credit and that no submission containing any such proposal should be put to the Sanctions Committee. On 16 May 1996, Mr Downer had indicated to his department that there was 'not a chance' of him agreeing to the letter of credit proposal.[881] He told his department that it was Australia's policy: 'to support sanctions against Iraq, and that we were going to do just that. The Iraqi regime was demonstrably a bad one, sanctions were-in this instance-having a tangible effect on the regime, and our job was to implement those sanctions thoroughly', and that 'it was no part of his responsibility to help Australian businesses to circumvent either tax obligations or UNSC resolutions'.[882]
Mr Pierce raised the question of the export on the Ikan Sepat and noted that DFAT 'now understood' BHP was the third party referred to in the notification which indicated payment would be 'cash payment to be received through third parties'. Mr Pierce wrote:
I understand from your colleagues that there is some thought being given to ways in which BHP's gift of wheat to Iraq might be re-formulated as a credit arrangement (whether on a five year term or different terms), or in a way which otherwise (possibly by payment in kind or in political goodwill) give BHP 'value' for the gift.[883]
Mr Pierce went on to advise that to change the arrangements from a gift arrangement to a credit arrangement would change the nature of the transaction so that it no longer came within the category notified to the Sanctions Committee. He further advised that if the gift arrangement were reformulated into a credit arrangement, the requirement of notification and disclosure to the Sanctions Committee would not have been met. He said:
As far as the department is concerned, the sale in January is a closed matter and must remain closed, with the shipment having been sent and received in the terms notified to the UNSC.[884]
27.134 Mr Pierce's letter was apparently copied to Mr Stott who discussed it with Mr Lyons that day.[885] Later that day, Mr Stott wrote to Mr Owen requesting that he forward all the original shipping documents for the Ikan Sepat marked for his attention.[886] Clearly, Mr Stott knew AWB still held these documents.
27.135 In the accounts of BHPP for the year ending 31 May 1996, the wheat purchase was noted within item 96 as: 'donations-non-deductible-$6,680,005'.[887] The payment was again listed under an annexure as a non-deductible Donation for Grain Purchase.
27.136 In a Director's Questionnaire to Management for the year ending 31 May 1996, in answer to the question:
Are there any material matters other than those discussed in this questionnaire on which management should advise the Board?[888]
The Board was advised:
Yes. A donation of $6.7 million sanctioned by the Australian Government and the United Nations, was made to the Australian Wheat Board to fund a shipment of wheat to Iraq for humanitarian purposes.[889] (Declaration made 12 July 1996)
27.137 On 4 June 1996, Mr Hunter replied to Mr Stott advising that AWB would release the original documents for the Ikan Sepat to BHPP provided BHPP would provide it with an indemnity in similar terms to that provided by AWB to the vessel owners.[890] On 5 June 1996, Mrs Sachak of AWB's legal section sent a further draft indemnity to Mr Stott.[891]
27.138 On 5 June 1996, Mr Stott sent a note to Mr Davidson Kelly and Mr Worthington concerning their proposed meeting with the Oil Minister of Iraq. Mr Stott noted:
BHP has also assisted Iraq throughout this difficult period. For example, in January 1996 we provided a USD 5 million pre-sanction financing arrangement which enabled 20,833 tonnes of humanitarian goods (wheat) to be delivered in February 1996.[892]
Mr Stott listed, under 'Other Important Leverage Points', 'Oil/Wheat/Debt trading opportunities. BHP's resources can be made available to assist Iraq in selling oil or buying humanitarian goods under 986'.[893]
27.139 On 6 June 1996, Mr Worthington prepared a note to Mr Davidson Kelly and others which was copied to Messrs Harley, Stott and Taylor concerning the approach proposed to be adopted at an imminent meeting of Messrs Paver and Davidson Kelly of BHPP with the Minister for Oil in Vienna.[894] One of the messages Mr Worthington wished to be conveyed to Iraq was that:
3. Australia has a long stable and flexible trade relationship with Iraq, one which had continued through the most difficult circumstances of the past decade …[895]
One of the examples cited by Mr Worthington was:
BHP's recent A $5million wheat loan at a time of need, a gesture perhaps unmatched by any other company/country.[896]
Mr Worthington's evidence was that Mr Stott told him about the 1996 shipment[897] and was probably the only source of his information.[898] He was told that BHPP's Chief Financial Officer had 'written off' the 'wheat debt'.[899] He believed Mr Stott told him this.[900] He was never told the shipment was a gift or donation[901] or of the terms on which the shipment was made.[902]
27.140 On 7 June 1996, Mr Stott signed a Letter of Indemnity in favour of AWB in respect of the Ikan Sepat shipment confirming that BHPP had requested AWB to deliver or arrange delivery of the wheat to the IGB without production of the bills of lading.[903] There is no other evidence that BHPP made such a request. On 11 June 1996, Mr Stott copied the Letter of Indemnity to Mrs Sachak and requested receipt of the original documents.[904]
27.141 On 11 June 1996, under cover of a letter dated 7 June 1996, Mr Hunter sent Mr Stott the original documents for the Ikan Sepat.[905] Mr Lyons noted on 11 June 1996 on the coversheet that the original documents were to be kept in safe custody indefinitely. BHP has produced to the Inquiry the complete set of shipping documents, including export invoices for the account of the IGB. Mr Lyons' evidence was that he directed that they be held in safe custody because they were the originals.[906]
27.142 On 21 June 1996, Mr Stott drafted a letter addressed to Mr Daoud:
For several months we have been discussing how we should proceed in terms of establishing a suitable payment mechanism for USD5million (20,833 metric tonnes) of grain we financed in January 1996 on the MV Ikan Sepat.
You no doubt recall that originally it was proposed that the IGB open an L/C in favour of the AWB which provided for payment no later than 5 years from the date of sale. Under the terms of the L/C the IGB was to pay cash or deliver oil to the value of the L/C in substitution for cash if U.N. restrictions on Iraqi oil exports were terminated within the 5 year period. The AWB would assign its payment and oil receipt rights under the L/C to BHP. In return for this assignment BHP would pay the AWB USD5 million cash on bill of lading date.
…
Rather than delay the shipment of urgently needed foodstuffs, in good faith, BHP decided to proceed on a basis that was acceptable to the U.N. i.e. 'cash payment to be received through third parties'.
BHP's intention was to ship the goods and then work with the U.N. and the Australian government post shipment to establish a payment procedure that was mutually acceptable. In this regard we have been lobbying our officials and frankly we were optimistic that a breakthrough was imminent. However, now that 986 has been finalised (and once again congratulations) the environment has again changed.
…
In the circumstances, I suggest we proceed on the following basis:
1. Accept, in light of 986, that there is now no value in pursuing a mechanism with the U.N.
2. BHP continue to hold the original shipping documents for the MV Ikan Sepat.
3. At a later stage in accordance with the original understanding, BHP to receive value by presenting the original documents to the IGB/CBI.
Zuhair, I look forward to receiving your reaction comments/suggestions and to exploring this or some other proposal with you in more detail.[907]
BHPP's copy of the letter bears a handwritten notation by Mr Stott[908] 'cleared with Jim Lyons'.[909] A copy of the letter was faxed by Mr Davidson Kelly to AWB and was produced by it.[910]
27.143 By this letter, Mr Stott thus raised, on behalf of BHP and BHPP, a categorisation of the transaction as a loan. That was contrary to the basis upon which Mr Prescott had approved the transaction, and contrary to the basis upon which both DFAT and the United Nations had approved the contract for the shipment to Iraq and DFAT had granted export permission. What Mr Stott wrote was plainly untrue. Mr Prescott approved the transaction as a gift and it was noted in BHPP accounts as a non-deductible donation. It had never been 'BHP's intention to ship the goods and then work with the UN and the Australian Government post shipment to establish a payment procedure that was mutually acceptable.'[911] Neither Mr Lyons nor Mr Stott could recall whether the letter was actually sent.[912] It seems unlikely that it was as Messrs Davidson Kelly and Stott were part of a delegation that met with Minister Saleh in Iraq on 22 June 1996. It seems improbable a letter would be sent to Mr Daoud the preceding day. Further, the evidence suggests that on receiving the draft Mr Davidson Kelly told Mr Stott he didn't 'need to worry about it' and that it was 'all under control'.[913]
27.144 On 22 June 1996, a meeting was held between the Minister for Trade, Mr Saleh, the Director General of Foreign Economic Relations, Ministry of Trade, Mr Al Obaidi and Messrs Davidson Kelly, Worthington, Stott of BHPP and Mr Richardson of DFAT. Mr Richardson made both a file note of the meeting[914] and sent a cable to Canberra concerning it.[915] Mr Richardson recorded there were two matters Mr Davidson Kelly wished to raise: ongoing oil field negotiations and the arrangements for the further delivery of wheat. Mr Davidson Kelly said:
… BHP's wish to arrange further shipments under a deferred payment method was facing difficulty in being accepted by the UN in New York and that now resolution 986 had been accepted, the situation had changed again.[916]
Minister Saleh said, in relation to the problem of payment terms for future shipments of Australian wheat by BHP that:
He believed a major part of the problem was in presentation and that BHP should not approach the UN with a request for deferred payment, rather they should notify of the shipment and not specify a payment mechanism. This he believed was 'an internal matter' for the Australian authorities, the AWB and BHP, which would be covered by BHP's agreement to accept payment at a later date against future oil sales. This was allowable under the terms of the UN resolutions, according to the Iraqis' interpretation.[917]
Minister Saleh further noted that the wheat supply had been appreciated 'even if only the original partial shipment had been supplied'.[918]
27.145 At the end of the meeting Minister Saleh returned to the issue of payment terms for future wheat shipments and said:
… it was up to BHP to find a way. He commented that it was an internal matter for the Australian authorities/parties. He expressed confidence that Mr Stott would be able to find a mechanism to address the problem of finding an acceptable way of implementing a deferred payment system for further wheat shipments.[919]
Mr Richardson noted that Minister Saleh expressed a 'definite connection (ie implied threat)'[920] between BHP fulfilling its wheat 'contract'[921] and 'finding a way around deferred payments and a positive outcome in oil dealings.'[922] Mr Richardson recorded that Mr Davidson Kelly knew the issue of deferred payment was a 'dead issue.'
27.146 A BHPP note apparently prepared for the meeting recorded:
A special feature of our long term trading relationship with Iraq has been our ability to maintain business by working together openly during very difficult circumstances. Throughout sanctions Australia has supplied the majority of Iraq's wheat requirements. BHP helped in this process by facilitating a shipment of approximately 21,000 tonnes of Australian grain.[923]
In an undated BHPP document titled 'HFD Mission Notes 19-29 June 1996', it was recorded that the Iraq Minister of Trade had advised that:
… - BHP's recent assistance has been discussed at the highest political level. He emphasised that those companies/countries that provide support now will be looked after favourably post sanctions; - He is keen for additional assistance and suggested that the UN pre sanction loan issue was a subject that could easily be innovatively resolved internally within Australia; …[924]
27.147 These records give a strong indication that the Iraqi Minister understood the wheat previously supplied to have been supplied on deferred payment terms. The Minister is not recorded as making reference to a gift. For the future, he contemplated not specifying payment terms to the United Nations, and by that means, obtaining approval of transactions which were in fact on deferred payment terms.
27.148 On 27 June 1996, the audit committee of BHP noted that the auditors had raised the matter of the payment to the Australian Wheat Board for a shipment of wheat to Iraq in December 1995. It noted that:
This matter had been raised with Management as the payment appeared to be in the nature of a donation and was not otherwise authorised.
The Chairman confirmed that this matter had been considered by the Board.[925]
27.149 On 6 February 1997, Messrs Worthington and Taylor sent a memorandum to the Business Development Team, which included Mr Stott and Mr Davidson Kelly.[926] The memorandum referred to the 1996 wheat shipment as a 'gift', and also noted Iraq's request that BHP 'commit to provision of 'humanitarian aid' of the order of US$100M via a loan facility mechanism outside of the production sharing agreement.' A proposal for the loan facility was described as follows:
The AWB is already owed some US$500 plus for wheat delivered over the past decade. The Ministry for Industry is creditor and is guaranteed by the Iraqi Central Bank. The debt is presumably saleable in the international market for a percentage of face value.
BHP could lend the AWB US$100 million in return for (a)US$100million face value of the Iraqi debt, which could then be either discounted into the international market for cash to reduce the debt or retained on its balance sheet in readiness for transfer back to the AWB upon repayment of the BHP loan; and (b) supply to Iraq of US$100 million of wheat supplied on the AWB's usual credit terms. The AWB has reduced its net debt; BHP has obtained either security for or some reduction in its debt exposure; and Iraq has received the US$100 million 'loan' outside the ambit of UN resolution 986.
In due course, the Iraqis will repay their debt to the AWB, which in turn would repay BHP either the full US$100 million plus interest (and BHP would transfer back the Iraqi sovereign debt) or if BHP had discounted the Iraqi debt into the market, the US$100 million plus interest less the amount raised by BHP on the sale of the debt.
UN Sanctions Committee approval for the AWB wheat sale transaction outside
